Answer to Question #247055 in Macroeconomics for Pearl

Question

Suppose the economy is initially at its long run equilibrium. If the nominal money supply increases, which of the following is a correct statement regarding how the economy will respond in the short-run?

Group of answer choices

The economy will experience cost push inflation since firms face a higher cost of borrowing.

The natural rate of unemployment will fall and the economy will experience demand pull inflation.

The unemployment rate will rise above the natural rate and inflation will fall.

The unemployment rate will decline below the natural rate.

Answer 1

In the short run, an increase in money supply will result in a fall in unemployment below its natural rate and economy will experience demand pull inflation.